Patience Rewarded
November was a very strong month for returns, with gains across low and high-risk funds. Performance was driven by large rallies in both stocks and bonds as investors embrace a soft-landing outcome for global economies.
An economic soft landing can be defined as inflation falling back to target without significant deterioration in economic growth or employment. This would allow central banks to ease interest rates lower over coming quarters. The bond market had been largely pricing “higher for longer” interest rates, but recent soft global inflation data drove a sharp bond rally this month – reflecting a greater chance of central bank rate cuts over the next 12 months. Encouragingly for our tilt to corporate bonds, the soft-landing expectation saw corporate bonds significantly outperform comparable government bonds in November.
Expectations of modest economic growth coupled with falling interest rates are a potent combination for share markets, delivering some of the strongest monthly returns since 2020. Following weak share markets in August to October, we took the opportunity to add exposure last month across global and Australian shares. In November, the strength in shares was very broad based, with gains across a wide range of sectors and geographies. Global shares were particularly strong and whilst many stocks in our funds delivered positive performance, recent addition Uber Technologies (+30.3%) as well as longer term holding Fiserv (+14.8%) were some notable outperformers. Falling bond yields also helped boost stocks that have high sensitivity to interest rates. This was reflected in performance of property companies Goodman Group (+9.7%) and Stockland (+16.7%).
Looking ahead, we are encouraged by the trajectory of the global economy towards a soft landing, but also wary that investors appear to be betting heavily on this outcome. Given the strong performance of all assets in November, we have prudently reduced exposure to both bonds and shares. Risks remain two sided – future growth and inflation could surprise on the up or downside. The medium-term outlook continues to offer strong investment opportunities and returns that exceed cash over the long run.
